Dow Jones  9834.68  9:31 am EST, Fri., February 22, 2002  NASDAQ  1716.24  For info, visit access.smallcapnetwork.com .  S & P 500  1080.95  To be removed, please click here .  Russell 2000    471.29  VOLUME 02: ISSUE 13 This investing strategy is one that investors are familiar with especially during the previous stock market boom when tech reigned supreme.  Buy the "picks and shovels" company!  This term is attributed to the Gold Rush of the 1840's-1850's when people were storming San Francisco looking for their share of riches.  As we all know very few actually struck gold whole the majority ended up worst than before they.  However, there were beneficiaries of the Gold Rush that amassed great wealth through supplying these gold seekers with the "picks and shovels".  The tremendous growth in the technology sector this last decade created many of today's household names. Personal computers became an amenity to every home and the internet became instilled into our everyday lives.  Unfortunately, investing in the internet proved to be disastrous as dotcom after dotcom seemingly dissipated as quickly as their astronomic rise.  Perhaps you were one of the millions of investors that got caught in the frenzy.  Don't blame yourself because we were all blinded.  Despite the carnage, a new industry was born and with that came the creation of the new industrial leaders.  Investors that purchased the "picks and shovels" of the tech sector amassed great fortunes even with the recent declines we have experienced the last three years.  There are many winners but one company distinguishes itself above the rest. Cisco Systems (CSCO) benefited from the increase in net usage regardless of what destinations or applications were utilized.  Increase in usage meant incremental revenue and profits for the router company.  It didn't matter what websites people were going to or who provided hosting services to these websites as long as people were utilizing these services.  However, not everyone saw Cisco for its potential.  If you invested $2400 on March 26, 1990 Cisco's first day of trading, you would've owned 100 shares.  That doesn't seem like a very large investment but today those same 100 shares would have grown to 28,800 shares or approximately $518,000.   2300% return is the kind of stuff every investor dreams of.  The chart above illustrates Cisco's metamorphosis from no name company to a pillar of corporate America. On the first day of trading the company's shares were worth a split adjusted price of $0.08 per share. Today's long anticipated profile features a company that is also in the "picks and shovels" business except this time the industry is biotechnology.  Their unique business model allows them to sit back and wait for the Photodynamic Therapy (PDT) industry to gain additional FDA approvals.  Each FDA approval means additional revenue and profits for the company.  There is an added bonus because this company recently became the first company to receive FDA approval for EVLT, a new micro-invasive technique is available which has been developed for the treatment of varicose veins.  This means that unlike most biotechs, the company has real revenues and is expected to be cash flow positive in 2002. The company has the luxury of spending almost no money in the FDA approval process because of the company's partnerships with the four major PDT drug makers. These drug makers are in turn spending millions of dollars to get their drugs approved.  For a company in its initial phase of growth their sales in 2001 were impressive and in 2002 cash flow positive should be easily obtainable.  There are some marquee names that are considered to be "smart money" who are associated with this company. The stock has begun trading today for the first time through the RTO process described in our January 16th edition. The company completed a reverse merger into a fully reporting "Shell" company, and opened for trading on the American Stock Exchange. Companies reverse merging into shells with preexisting listings is no rarity, but completing a merger into an unlisted shell, and then opening for trading on the American Stock Exchange is unheard of. Without further delay we present our February profile: February Profile: Diomed Corporation (AMEX: DIO) Stock Listing: AMEX: DIO Estimated Shares Issued and Outstanding: 31.3 million Estimated Public Float: 9.2 Million Opening Price: $6.95 Market Capitalization: $218 Million 52 High and Low Since Merger: $9-$5.45 Corporate Web Site: http://www.diomedinc.com/ Diomed Corp, based out of Massachusetts, opened for trading today on the American Stock Exchange at $6.95 per share, and we believe the stock should be accumulated up to $8.00 in the short term.  Long term investors could enjoy upside potential considerably higher based on the growth of the PDT and EVLT industries. The company manufactures and markets lasers and fiber optics which are used in unique treatment protocols for many types of cancer.  In addition, Diomed is the first company in approved by the FDA for the treatment of EVLT which known as varicose vein removal.  The following is a review of Diomed's products and how they work:   Photo Dynamic Therapy (PDT) Diomed manufacturers and markets the lasers used in a revolutionary treatment known as Photo Dynamic Therapy, or PDT for short. The FDA has approved the use of Diomed's lasers and fiber in a "Modality", or three step treatment with Axcan Pharmaceutical's (AXCA) Photofrin.   Photofrin is used for certain treatments associated with throat and lung cancer but has the potential to be administered for other treatments as well. Photodynamic therapy, or PDT, uses a light sensitive drug, such as Photofrin, and laser light to kill cancer cells. The drug is injected into the patient and concentrates in tumors. Photofrin remains inactive until it is combined with a special laser light. The light activates the drug which produces a toxic form of oxygen that destroys tumor tissue. For endobronchial lung tumors, the patient is injected with Photofrin. Two days later, laser light is delivered through a small optical fiber inserted through a bronchoscope, an instrument used for examination of the bronchial tubes. One to two days after the laser treatment, destroyed tumor tissue is removed during a second bronchoscopy procedure. The procedure is typically performed on an outpatient basis; however, an overnight hospital stay may be recommended for some patients. After treatment the patient must stay out of the sun for a few days waiting for the remainder of the drug to be absorbed into the tissues. PDT offers several advantages over standard treatment. The primary benefits of lung PDT are the limited side effects, preservation of the lung, and the fact that PDT can be repeated if necessary. The laser costs upwards of $50,000 not including a $9,000 installation fee. Diomed has about a 50% gross profit on devices.  In the area of disposables the company's stated goal is a 65% margin on the one-time fiber used in each procedure. However, the company receives $500 to $550 for the fiber used in each procedure, and their cost is approximately $150.  For competitors, the barriers to entry are very high as the FDA Approval for this "Modality" requires Diomed's laser and fiber to be used in every procedure. Diomed has partnerships with the four major PDT companies, all of whom have new drugs in the FDA Pipeline which could use Diomed's lasers and fiber in the treatments modalities. It is estimated the cost of completing the FDA Approval process for a new drug is approximately $150 million. Less than 40% of new drugs which begin the approval process ever receive final FDA Approval. Diomed is in the enviable position of profiting from the investments made by their four drug company partners because the company doesn't finance the costs associated with the approval process. This minimizes the downside risk and maximizes the upside potential for investors because there is no fear of the company running out of capital.  This is unlike most biotech companies that find themselves in a precarious financial state due to the millions of dollars poured into the FDA approval process.   PDT- The "Off Branding Market" Although the FDA has approved the three part "Modality" for treatment of specific types of throat and lung cancer. This modality is proven to be effective in treating other types of cancer as well. Doctors are using the modality in a practice known as "Off Branding". FDA regulations prohibit Diomed and Axcan Pharmaceutical (manufacturer of Photofrin) from marketing the modality for treatment of any types of cancer which has not been approved by the FDA. However, doctors are not restricted in the same manner and are now routinely prescribing the use of this modality for many types of cancer. In fact, Diomed estimates that as much as 50% of its current revenues could be generated in "Off Branding" procedures. Insurance companies and Medicare are providing full coverage benefits for all treatments. Doctors, Hospitals, and Insurance Companies are embracing this relatively new therapy as it has proven to be a very effective treatment for cancer, but is far less costly, has very few side effects, and requires far less follow-up treatment than its counterparts, chemotherapy and radiation.   Future Of Photodynamic Therapy (PDT) The table above illustrates the additional treatments PDT drug makers are aiming to gain FDA approval for. This will potentially impact Diomed's sales in the future as each additional FDA approval could mean additional revenues and profits for Diomed. Approximately 40% of these new drugs will eventually find their way to market. The table represents hundreds of millions in potential revenue for Diomed, with no associated up front costs. The company has sold about 100 laser systems to its four drug company partners, and the Diomed laser and fiber is being used in clinical trials by these companies. FDA approvals are granted for the three stage treatment or "Modality"- which is the combination of the drug, specific laser, and fiber. FDA regulations prohibit the use of any substitute lasers or fibers in the treatment, which creates a very formidable barrier to entry for other laser and fiber manufacturers. Once approval is granted, a competing company would have to replicate the clinical trials with their own equipment to achieve an FDA approval, absorbing the cost out of their own pocket. The drug manufacturers have no incentive to seek alternative suppliers of lasers and fiber as their profits come from the sale of the drug. As long as Diomed is a reliable supplier of equipment, their drug company partners will be content with their profits. The next anticipated pending FDA Approval which represents a major commercial opportunity for the company is expected to be granted in the fall of this year. Axcan is in clinical trials for a modality to treat "Barrett's Esophagus", more commonly known as Acid Reflex Syndrome. The market is estimated to be 10 times that of Photofrin, so Diomed's growth could be explosive after this approval is granted.   EndoVenous Laser Treatment (EVLT?)  On January 22, 2002, Diomed announced it had been granted the long awaited FDA Approval for EVLT?, a new and revolutionary treatment for varicose veins.  The company's breakthrough procedure has been in use outside of the United States but the recent FDA approval means the treatment will be available domestically.  Diomed's EVLT treatment has even been the subject of a feature on Good Morning America and New York Times. Diomed believes demand will immediately surface for this newly approved procedure, and as much as 68% of its 2002 revenues could be derived from EVLT?. EndoVenous Laser Treatment is the most painless and effective way to remove varicose veins which affects one of every two people 50 or older, and about 15 percent of men and 25 percent of women overall according to the Society of Cardiovascular and Interventional Radiology.  For some varicose veins is simply a cosmetic issue but they can also cause aches and pains, cramp and leg swelling. A medical study conducted 15 years ago in Switzerland showed that those with varicose veins also stand a 50 percent higher risk of developing blood clots or leg ulcers.  EVLT? is a quick, minimally invasive laser procedure that leaves no scar, has a short and relatively pain free post-operative recovery period and is performed under local anesthesia in the doctor's treatment room.  A patient comes in lies on an examining table and has an IV placed in their saphenous vein at knee level. The skin is just nicked when a laser fiber is inserted into the vein, and it goes up to the groin area. The doctor then numbs the vein, and turns on the laser. It's highly targeted energy heats and seals the vein shut.  The market for EVLT is enormous as hundreds of thousands of operations are done for varicose veins a year in the United States. Varicose vein sufferers currently have two options, either get surgery to remove the vein or injection therapy to close it up.  Surgical ligation, or removal of the saphenous vein in the leg, fails about 10 percent of the time. Patients are required to be placed under anesthesia, there is a two-week recovery period, and it often takes a second procedure to really see results. Side affects of the surgery include pain, bruising and scarring. Another technique used to battle varicose veins is ultrasound-guided sclerotherapy, which involves injecting an irritant into the saphenous vein to close it up. It only works permanently about 50 percent of the time.  There is so much interest and demand for this new treatment, Diomed has set up a web site which explains the entire treatment process. You can even locate a treatment facility through this site. Check out http://www.summerlegs.com/ for complete information. Diomed's EVLT? is a simple and relatively painless solution with 98% success rate.  It requires approximately 45 minutes to complete the treatment. Women and men worldwide who have been plagued by unsightly varicose veins now have a reasonable solution to their problem.    Financial Outlook Audited 2001 financials for Diomed will be out very shortly. However, based on revenues through the end of September, the company will achieve approximately $8 to $8.5 million in sales in 2001.  Discussions with management lead us to estimate revenues in 2002 to be around $18 million.  That would be an increase of over 113% from 2001 estimates.  Revenues from the newly FDA Approved EVLT? procedure are expected to represent 68% of sales in 2002 but keep in mind these estimates do not include additional FDA approval in the PDT sector. Diomed expects to turn profitable this year. As more clinics purchase lasers from Diomed in order to offer these procedures to patients, the demand for the disposables should increase dramatically, and margins will improve. For 2001 losses are anticipated for the year due to the high cost of R & D but the company expects to turn cash flow positive in 2002 and could make as much as $6-$7 million in 2003 off current FDA approved products.  These figures do not factor in additional FDA approvals for PDT treatments. The company manufactures its own lasers, but the fiber component is manufactured by a third party. Just prior to going public, Diomed completed a $10 million private placement which will partially be used to purchase the fiber manufacturer, thereby increasing its profit margins on the disposable side of its business. Sales should more than double this year, and increase nearly 60% the following. That equates to a 275% percent growth rate over the next two years with no additional FDA Approvals. This type of revenue growth is very rare for companies that are in an industry that is just beginning to blossom. This Fall should bring another FDA Approval from Axcan Pharmaceuticals for the PDT treatment of "Barrett's Esophagus". The market for this product is estimated to be 10 times the market for current PDT applications. This provides shareholders with a potential windfall event for the stock price. Smart Money Below you will find the names of several high profile early stage investors in Diomed who helped finance the company's growth as a private company. Here are four key individual names who have invested personally through funds they control: Sir Richard Branson- High Profile Founder of Virgin International (Virgin Airlines and Records) Jack Rivkin- Executive Vice President at Citigroup Investments and former head of research at Smith Barney  Jonathan Cohen- JHC Capital Management - Formerly at Merrill Lynch and Smith Barney Robert Lessin- Chairman of Wit SoundView Group   Keep in mind that although these are some of the biggest names on Wall Street, their involvement does not guarantee that Diomed will perform better than other companies we have covered. Investors should not view their investment as an endorsement. These investors probably diversify their holdings by investing in many development stage companies.  With that being said, the fact they are involved in Diomed clearly shows that the company has enough potential to attract big time names.    Conclusion The SmallCap Digest has scoured thousands of companies to find you the hidden gems.  The information we have provided you on Diomed is coming to you before the rest of the financial community knows much about this company. As with any investment there is risk, but like the early investors Cisco, the courage to act in the early stages may lead to significant rewards. Today is the first day of trading for Diomed, and because they went public through an RTO you are on a level playing field with other open market investors.  We believe Diomed should be accumulated up to $8.00 for a move to above $11 during 2002. Going forward, the further development and FDA approvals in the PDT industry coupled with Diomed's EVLT treatments could mean significant upside to the company's performance. Investing in "Picks and shovels" companies have paid off handsomely for investors in the past. Diomed is one of the few biotechs that are positioned to profits from FDA approvals without spending its own money. This coupled with the company's position as the industry leader in EVLT presents a very compelling opportunity to own a future superstar. Investors with a tolerance for high risk and high reward opportunities should consider Diomed (DIO) for their portfolios.       For a due diligence package on Diomed Inc., you can receive a free investor information kit by contacting Jason Sundar toll free at 1-888-400-0643.  D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. 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